Economists React: China’s Inflation Tepid, and Set to Stay That Way

China’s consumer price inflation stayed low throughout 2013, and shows no sign of picking up much this year. December’s consumer price index, published Thursday, rose 2.5% from a year earlier, down from 3% in November. Economists believe inflationary pressure will remain subdued, but most agree monetary policy is likely to get tighter as the People’s Bank of China tries to rein in credit growth.

The producer price index, which tracks prices paid to manufacturers at the factory gate, remained stuck in deflationary territory. The PPI was down 1.4% on-year in December — the same as November — thanks to weak global commodity prices and excess capacity in many sectors of Chinese industry, which has led companies to slash prices.

Economists weigh in:

–December price data from China confirmed inflation is not an issue that policy makers need to worry about, with consumer price inflation easing and well short of the 4% upper-limit target, and producer price deflation persisting unabated… It seems that the woes of excess capacity still outweigh the demand recovery. As suggested by the latest purchasing managers’ reports, the growth acceleration looks near its end, which is likely to exert downward pressure on the PPI in the coming months. – Wei Yao, Société Générale

–Consumer price inflation fell further in December on the back of a sharp drop in food inflation. It may rebound this month due to the usual price volatility around Chinese New Year but is likely to remain subdued over the medium term. Despite the benign inflation outlook, we expect policy to remain relatively tight to contain the structural risks from credit growth… We are not concerned about this prolonged bout of producer price deflation as the index is heavily weighted toward industrial inputs. As a result, falling producer prices benefit most firms. – Mark Williams and Julian Evans-Pritchard, Capital Economics

–CPI inflation fell in December on low food prices, which dropped as vegetable crops were good and the government’s austerity campaign affected demand. Core inflation developments remain steady though. Meanwhile, China’s PPI is still facing downward pressure stemming largely from global—not China-specific—factors… Looking at the recent behavior of commodity prices on international markets, these downward pressures are likely to persist for a while longer. – Louis Kuijs, RBS

–We expect overall inflation pressures to remain modest in 2014, providing ample room for the deregulation of resources and utilities prices, as outlined in Beijing’s comprehensive reform agenda. Restructuring industrial sectors characterized by overcapacity was selected as one of Beijing’s key reform tasks in 2014 by the Central Economic Work Conference… Inflation pressures remain modest, which will allow policymakers to continue focusing on policies to support growth while implementing structural reform. – Xiaoping Ma and Hongbin Qu, HSBC

–While the near-term inflation outlook appears benign given contained food prices and moderating growth momentum, we expect CPI inflation to move back above 3% in the first half of 2014… Vegetable prices have ended their downward trend and started to increase again going into the new year. Rising labor costs, continued deregulation in factor and resource prices, and a less favorable pork cycle and base effect will likely add to inflation later this year. We continue to expect the PBOC to maintain a tightening bias in its monetary policy stance given the need to reduce leverage and adjust the country’s economic structure. – Jian Chang and Jerry Peng, Barclays

–We expect monetary policy to maintain a slight tightening bias in the first quarter. Inflation is not a major concern at this stage, but the crackdown on shadow banking will likely intensify and financial institutions may need to deleverage further. With the country’s leadership comfortable with the current speed of growth there is no strong incentive to loosen policy to stimulate growth, while low inflation provides more room for policy support when growth slows more sharply. – Zhiwei Zhang, Nomura

–Subdued inflation would be supportive of a neutral monetary policy rather than tightening. In the past couple of months the market has been increasingly worried that the PBOC may be forced to tighten credit supply if CPI inflation approaches the 3.5% official cap. We thus believe a well-below 3.0% CPI inflation could be good news for the markets, as monetary tightening is not justified. Actually, since the PBOC was reluctant to inject liquidity despite rising rates in the past two months, lower inflation could give the PBOC more room to ease the liquidity situation. – Ting Lu and Xiaojia Zhi, Bank of America Merrill Lynch

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